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Tax Expenditures and Global Labor Mobility

Governments often deliver social welfare benefits through “tax expenditures,” provisions of the tax code (such as home mortgage deductions) designed to serve social policy objectives. This Article considers the criteria for granting tax expenditures to individuals who work abroad. International tax norms currently assign the primary entitlement to tax labor income to the state where the taxpayer works, but they assign the obligation to confer personal tax expenditures exclusively to the state where the taxpayer resides. At a time when leading tax treaty policymakers have begun to question this allocation rule, this Article examines its normative underpinnings, and concludes the current practice is efficient, fair, and simple.

In constructing the efficiency arguments, this Article introduces the concepts of “labor export neutrality” and “labor residence neutrality” as tools for analyzing government policies that affect global labor mobility. A policy is labor export neutral if it does not distort taxpayers’ decisions about where to work. A policy is labor residence neutral if it does not distort taxpayers’ decisions about where to reside.